IRA FAQs

An individual retirement account (IRA) is a tax-advantaged account designed specifically for retirement savings. Unlike a 401(k), an IRA is not tied to your employer — you can open an IRA on your own through a bank, brokerage company or another financial institution. While investment options vary by provider, at Edward Jones, you can invest your IRA in a variety of investments, including stocks, bonds, certificates of deposit (CDs), mutual funds, exchange-traded funds (ETFs) and money market funds.

The two most common types of IRAs are traditional IRAs and Roth IRAs.

The main difference is the way contributions and withdrawals are taxed. Traditional IRA contributions are generally made with pretax dollars; any earnings growth is tax deferred and future withdrawals are taxed like income. Roth IRA contributions are made with after-tax dollars and future, qualified withdrawals are tax-free.

Another difference between traditional and Roth IRAs is required withdrawals. If you have a traditional IRA, the IRS requires you to withdraw a minimum amount each year when you reach 73, known as a required minimum distribution (RMD). A Roth IRA has no RMDs.

See Roth IRA vs. traditional IRA for more details on how these IRAs compare.

A 401(k) plan is offered through your employer and allows you to contribute a percentage of your salary for retirement savings. Employer plans may offer a traditional 401(k) and a Roth 401(k) for employees. Like an IRA, a traditional 401(k) is funded with pretax dollars and distributions are taxed as ordinary income, while a Roth 401(k) is funded with after-tax dollars with the potential for tax-free withdrawals in the future.

With a 401(k), your employer makes several decisions on your behalf — where your account is held, when you’re eligible to contribute, what investment options and services are available to you, and when you can take distributions from your account, to name a few. 401(k) plans are generally less expensive than an IRA and can offer certain benefits that are unavailable to IRAs, such as employer matches, the ability to borrow against your assets, the ability to take penalty-free withdrawals beginning at age 55 if you meet certain criteria and the ability to delay RMDs while still working.

A traditional IRA is an individual account you contribute to and manage. It offers you more control and choice over where and how your contributions are invested as well as when you can access your funds. These accounts are not tied to your employer and are transferable between institutions at any time.

If you want to maximize your retirement savings, you can contribute up to annual limits for your 401(k) and a traditional IRA as long you meet the eligibility requirements of each.

A 401(k) plan is offered through your employer and allows you to contribute a percentage of your salary for retirement savings. Employer plans may offer a traditional 401(k) and a Roth 401(k) for employees. Like an IRA, a traditional 401(k) is funded with pretax dollars and distributions are taxed as ordinary income, while a Roth 401(k) is funded with after-tax dollars with the potential for tax-free withdrawals in the future.

With a 401(k), your employer makes several decisions on your behalf — where your account is held, when you’re eligible to contribute, what investment options and services are available to you, and when you can take distributions from your account, to name a few. 401(k) plans are generally less expensive than IRAs and can offer certain benefits that are unavailable to IRAs, such as employer matches, the ability to borrow against your assets and the ability to take penalty-free withdrawals beginning at age 55 if you meet certain criteria. Unlike Roth IRAs, there are no income limits for Roth 401(k) contributions, but you generally can’t access your contributions at any time like you can with a Roth IRA.

A Roth IRA is an individual account you contribute to and manage. It offers you more control and choice over where and how your contributions are invested as well as when you can access your funds. These accounts aren’t tied to your employer and are transferable between institutions at any time. If your 401(k) plan doesn't offer a Roth option, a Roth IRA can help you diversify the tax treatment of your assets, giving you greater flexibility to manage your taxes in retirement.

Additionally, if you want to maximize your retirement savings, you can contribute up to the annual limits for your 401(k) and a Roth IRA as long you meet the eligibility requirements of each.

You may contribute to a traditional IRA (up to the annual contribution limit) if you have taxable compensation. However, your ability to deduct your traditional IRA contributions from your income depends on how much you earn and whether you or your spouse is an active participant in an employer-sponsored retirement plan, such as a 401(k).

You may contribute to a Roth IRA (up to the annual contribution limit) if you have taxable compensation and your modified adjusted gross income (MAGI) is below a certain threshold. MAGI limits vary depending on your tax-filing status.

See IRA contribution limits for more details.

Taxable compensation generally includes any taxable income that's received from a job or self-employment, such as:

• Wages
• Salaries
• Tips
• Commissions
• Self-employment income
• Nontaxable combat pay
• Taxable alimony (for divorce agreements entered into prior to 2019)
• Non-tuition fellowship or stipend payments (including payments used in the pursuit of graduate or postdoctoral study)

Sources of income that generally do not qualify as taxable compensation include:

• Earnings from property, interest or dividends
• Government benefits, such as Social Security and unemployment benefits
• Retirement account distributions
• Pension or annuity income
• Deferred compensation
• Income from partnerships for which an individual doesn't provide services that are a material income-producing factor
• Foreign earned income

If you’re eligible, you can contribute up to 100% of your taxable compensation or the annual contribution limit, whichever is lower. Contribution limits are set every year by the IRS and are tied to cost-of-living adjustments. Keep in mind your total contribution can be no more than the annual limit for all your traditional and Roth IRAs combined.

See IRA contribution limits for more details.

Yes, you can contribute up to the annual limits for your employer plan and an IRA as long you meet the eligibility requirements. However, if you or your spouse is covered by an employer-sponsored retirement plan and your income exceeds certain levels, you may not be able to deduct your entire IRA contribution.

Contributions to a Roth IRA are never tax deductible. You pay income taxes on the full amount of your contribution.

You may be able to deduct your traditional IRA contributions from your income, depending on how much you earn and whether you or your spouse is an active participant in an employer-sponsored retirement plan, such as a 401(k).

See IRA contribution limits for more details.

You can open and make contributions to a traditional or Roth IRA for your non-working spouse if you meet the following criteria:

• You file a joint tax return.
• You have taxable compensation.
• The total contributions for both spouses don’t exceed your taxable compensation.
• For Roth IRA contributions, your modified adjusted gross income (MAGI) is below the income limits.

Distributions of any pretax (deductible) contributions and earnings are taxed as ordinary income. Additionally, distributions before 59½ may be subject to a 10% early withdrawal penalty, unless you qualify for a penalty exception.

Distributions of after-tax contributions (non-deductible) aren’t subject to taxes or penalties since you’ve already paid taxes on those dollars. However, if you have pretax and after-tax assets in your traditional IRA(s), your distribution will include a mix of pretax and after-tax dollars based on the percentage each represents for your total IRA balance. This is known as the pro rata rule.

To determine the percentage of your distribution that’s made up of pretax dollars (and subject to taxes), the IRS looks at all your traditional IRAs (including SEP and SIMPLE IRAs), not just the IRA you took the distribution from.

If it’s been at least five years since you first funded a Roth IRA and you’re 59½ or older, your Roth IRA distribution is tax- and penalty-free. If you don’t meet both criteria, though, the taxation rules are a bit more complex.

Distributions from your Roth IRA are generally composed of one or more of the following sources: (1) regular contributions, (2) taxable conversions, (3) non-taxable conversions and (4) earnings. Each source is subject to different tax rules. As a result, how your Roth IRA distribution is taxed depends on the source of the distribution.

Roth IRA rules require you to distribute sources in the following order:

1. Regular contributions: Regular contributions can be distributed anytime without taxes or penalties.
2. Taxable conversions (oldest first): Distributions of taxable conversions won’t be taxed but will be subject to the 10% early withdrawal penalty if it hasn’t been at least five years since the conversion, you're younger than 59½, and you don’t qualify for a penalty exception.
3. Non-taxable conversions (oldest first): Distributions of non-taxable conversions are not subject to taxes or penalties.
4. Earnings: If it’s been at least five years since you first funded a Roth IRA and the distribution is taken for one of the following reasons, distributions of earnings are tax- and penalty-free:
   • You’re 59½ or older
   • You’re disabled
   • The distribution is for a qualified first-time home purchase (up to $10,000)
   • The original account owner died
   • If you don’t meet those requirements, you can still avoid the 10% penalty if you qualify for another penalty exception, but the distribution will be subject to taxes.

Per the IRS, the 10% penalty is waived for early IRA distributions if you:

• Inherited the IRA after the original account owner died.
• Are disabled or terminally ill.
• Are a victim of domestic abuse (up to $10,000 lifetime limit).
• Are a reservist called to active duty after Sept. 11, 2001.
• Are impacted by a qualified disaster and take the distribution within the required timeframe (up to $22,000 lifetime limit).
• Take distributions in substantially equal payments over your life expectancy.
• Have a personal or family emergency expense (no more than one distribution per year, up to $1,000).
• Have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• Use the distribution to pay for medical insurance premiums due to unemployment.
• Use the distribution for qualified higher education expenses.
• Use the distribution to build, buy or rebuild a first home (up to $10,000).
• Use the distribution to pay for expenses related to the birth or adoption of a child (up to $5,000 taken within one year following the event).
• Use the distribution to satisfy an IRS levy.

Required minimum distributions are minimum amounts that must be withdrawn from your traditional IRA once you turn 73 and each year thereafter. If you don’t, you’ll take a significant hit — the IRS penalty for not taking your RMD is 25% of the amount not taken by the deadline (or 10% if corrected in a timely manner). The deadline to take your first RMD is April 1 of the year following the year you turn 73, and Dec. 31 each year after that.

RMDs are calculated by dividing the Dec. 31 account balance from the prior year by a certain life expectancy factor from the appropriate IRS table. The Uniform Life table is used in most cases, and the life expectancy factor is determined based on how old the account owner will be at year end.

Yes, you can move your IRA to another provider at any time. There are two ways to move your IRA – a transfer or a rollover.

An IRA-to-IRA transfer is when your IRA moves directly from your current IRA provider to another IRA provider. There are no tax consequences or tax reporting with a transfer, and you can transfer your IRA as many times as you want.

With an IRA-to-IRA rollover, a distribution is made to you either in the form of cash or shares of a security. You must deposit the funds into an eligible IRA within 60 days to avoid taxes and penalties, and you may only roll over the same assets that were distributed. For example, if you take a distribution of cash, only cash may be rolled over; if you take a distribution of securities, only shares of those specific securities may be rolled over. Regardless of whether you roll over by the 60-day deadline, the transaction must be reported on your taxes. Additionally, you may only complete one IRA-to-IRA rollover per 12-month period.

To move an existing IRA to Edward Jones, contact a financial advisor to help you determine the method best suited to your needs.

You generally must meet two criteria to be able to roll over your employer retirement plan to an IRA:

• Your plan must allow you to take a distribution.
• The distribution must be eligible to be rolled over. Certain distributions, such as RMDs and hardship distributions, are not eligible.

Additionally, Roth 401(k) assets may only be rolled over to a Roth IRA. Pretax 401(k) assets can be rolled over to a traditional or a Roth IRA. But, if you roll over pretax 401(k) assets to a Roth IRA, it’s considered a Roth conversion, and the amount that’s rolled over will be taxed.

It’s also important to know that there are differences between employer plans and IRAs. Make sure you understand your options before rolling over. A financial advisor can also help you determine whether rolling over makes sense for you.

Rolling over IRA assets into an employer retirement plan is sometimes called a reverse rollover. You can’t do a reverse rollover of after-tax or Roth IRA assets. However, you may be able to roll over pretax IRA assets if permitted by your employer plan. You can check with your employer or plan administrator to determine what your plan allows.

All IRA-to-IRA rollovers are indirect rollovers. Employer plan rollovers can be executed as a direct rollover or an indirect rollover.

With a direct rollover, your employer plan distributes the money directly to your IRA or issues a check payable to your IRA. Because the money moves directly, no taxes are withheld from your distribution.

With an indirect rollover, your employer plan distributes the money to you. However, your plan is required to withhold 20% of the distribution for federal taxes. If you roll over the distribution to an IRA within 60 days, you can avoid taxes and penalties, but you’ll have to come up with the 20% that was withheld out of your own pocket. 

A Roth conversion is when you move funds from a traditional IRA to a Roth IRA. With a Roth conversion, you pay taxes now to have access to tax-free distributions in the future, as well as other benefits Roth IRAs offer. But, once a traditional IRA is converted to a Roth IRA, you can’t undo this action.

While there are no eligibility requirements for a Roth conversion, there are several factors to consider when determining whether a Roth conversion makes sense for you, including your current tax rate versus your expected tax rate in retirement, your ability to pay taxes on the conversion, when you need to access your funds, your current mix of pretax and after-tax assets, and your desire to leave a tax-free inheritance for your heirs. A financial advisor can help you determine whether a Roth conversion is a good option for you.

A SEP IRA can be converted to a Roth IRA at any time. A SIMPLE IRA can be converted after two years have passed from the date of the first deposit in the SIMPLE IRA.

An inherited IRA is an IRA you open when you inherit an IRA or employer plan account due to the death of the original owner. In most cases, you’ll have to move assets from the original owner’s account to an inherited IRA in your name. While the tax treatment of inherited IRAs is the same as other IRAs (i.e., withdrawals of pretax assets are taxed as ordinary income when distributed and qualified withdrawals of Roth assets are tax-free), inherited IRAs are subject to different rules when it comes to contributions, rollovers and required distributions.

No, you can’t make additional contributions to an inherited IRA.

Yes, you’ll have to take distributions from an inherited IRA by a certain deadline, regardless of whether it’s a traditional or Roth IRA. The amount you must take from the inherited IRA and the deadline to take it vary depending on the beneficiary.

If the original owner died after 2019, most beneficiaries must deplete the inherited IRA by the end of the 10^th calendar year after the original owner’s death, which is often referred to as the 10-year rule. Minimum annual distributions generally aren't required during the 10-year period if the original owner passed before they had to begin taking required minimum distributions (RMDs). However, if the original owner died after they had to begin RMDs, RMDs must be taken during the 10-year period, based on the beneficiary's life expectancy.

While any individual beneficiary can elect to take distributions under the 10-year rule, certain beneficiaries have other options:

You inherited the IRA from your spouse. You have the most options when it comes to an inherited IRA. You can:

• Roll the inherited IRA into an IRA in your own name.
• Delay taking RMDs until the original owner would have reached 73 (if the original owner passed before they had to begin RMDs).
• Take RMDs based on your own life expectancy or the original owner’s life expectancy, whichever is greater, if the original owner passed after they had to begin RMDs.

You’re a minor child of the original owner. You can take RMDs based on your own life expectancy until you reach the age of 21. Upon reaching 21, the 10-year rule kicks in and you must deplete the inherited IRA by the end of the 10^th calendar year after reaching 21. You must continue taking RMDs during the 10-year period, regardless of whether the original owner died before or after they had to begin RMDs.

You’re chronically ill or disabled. You can take RMDs based on your own life expectancy. If the original owner passed after they had to begin RMDs, you also have the option to take RMDs based on the original owner’s life expectancy. To qualify, you must meet the definition of chronically ill or disabled on the original owner’s date of death.

You’re older or no more than 10 years younger than the original owner. You can take RMDs based on your own life expectancy. If the original owner passed after they had to begin RMDs, you also have the option to take RMDs based on the original owner’s life expectancy.

A financial advisor can help you determine which option makes sense for your situation.

Only a spouse beneficiary can combine an inherited IRA with their own IRA.